U.S. regulator warns mutual funds on mischaracterising fees

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

WASHINGTON (Reuters) - Mutual funds may be misdirecting fees, which has the potential to hurt investors’ returns, the U.S. Securities and Exchange Commission said in guidance it released on Wednesday, after examining some mutual funds, investment advisers, broker-dealers, and transfer agents.

The guidance was on payments that funds make to intermediaries for shareholder and recordkeeping services, which the SEC called “sub-accounting fees.” It said its recent queries had raised questions as to whether part of those fees “may have been used to pay for activities that are primarily intended to result in the sale of mutual fund shares.”

“Mutual fund fees have a direct impact on investor returns,” it continued.

In particular, investors could base their buying decisions on funds’ fee levels and “potential mischaracterization of fees may lead them to invest in funds that they would not otherwise have selected.”

Also, current regulations limit how funds can finance the activities that lead to the sale of shares, which is also known as distribution, as a way to prevent potential conflicts of interest or the inappropriate use of assets, the SEC said.

The commission suggested funds’ boards put in place processes to evalauate whether some sub-accounting fees are going toward selling shares.

That includes getting “the overall picture” from advisers and service providers of servicing arrangements and learning how the fees affect other payment flows, the SEC said.

It also said advisers and others providing services should inform boards “if certain activities or arrangements that are potentially distribution-related exist in connection with the payment of sub-accounting fees.”

If they do exist, then boards should “evaluate the appropriateness and character of those payments with heightened attention.”

Reporting by Lisa Lambert